For most people, having a car is essential. Anyone considering bankruptcy will naturally want to know what will happen to his or her car-or cars-as part of the bankruptcy process. The answer, like so many bankruptcy issues, is complex, and depends on the state in which the person files, and whether the he or she files under Chapter 7 or Chapter 13.
Every state in the country allows an individual to keep certain items during bankruptcy. (These items are exempt from being used to pay creditors, and are thus called exemptions.) Each state has a list of exemptions for real estate, personal property, cars, et cetera. Florida offers a $1000 exemption for motor vehicles. If the car isn’t fully paid for, this value applies to the owner’s equity in the car. Therefore, if the car’s value (or the owner’s equity in the car) is less than $1,000, it is exempt from being sold to pay creditors.
Cars and Chapter 7
If someone still owes money on their car, he or she has three options: Redeem, reaffirm or surrender. Redemption is useful if the car is nearly paid off-the owner simply pays the balance due and owns the car free and clear. However, obviously, most people filing for bankruptcy do not have extra money lying around to do this.
The second option is to reaffirm the loan, in which the owner agrees to continue making payments on the car throughout the bankruptcy process. This is a great option if the owner is confident that he or she can continue to make the payments on time.
The third option is to surrender the car back to the creditor, who will then try to sell it. The owner’s existing debt is discharged, but the owner will now have to find a new way to get around town.
Cars and Chapter 13
Because Chapter 13 offers a plan for repayment of debt over time, its approach is different. If a car is newer than 910 days (roughly 2 and a half years), the owner must repay the full value of the car loan. However, if the car is older than that, the owner must pay only the car’s current market value. It’s a good idea to get more than one valuation of the car to ensure it is valued as inexpensively as possible.
An Attorney Can Help
If you are considering filing bankruptcy, deciding which form of bankruptcy is right for you can be a complex decision. It is well advised that you consult with an experienced bankruptcy attorney who can review your individual circumstances and recommend the best options for your situation.